Many companies are in the process of revising their pay practices in response to the numerous cases filed in the mortgage industry that accuse employers of improperly denying loan officers minimum wage and overtime. Class action lawyers and state and federal labor departments have collected millions of dollars from mortgage brokers for the violations of the Fair Labor Standards Act (FLSA). These claims allege that loan officers are non-exempt employees entitled to minimum wage and overtime under the FLSA. Hence, by paying loan officers strictly through commission, without regard to hours worked, employers are alleged to have violated the FLSA. Under the FLSA, all employees are entitled to minimum wage and overtime unless they fall under one of the exceptions, which exempts the workers from these and other requirements. There are a number of exemptions, some of which can be applied to loan officers. One exemption that can be particularly applicable and useful is called the outside sales exemption.
Under the outside sales exemption, an employee can be paid strictly on commission. Hours need not be tracked, there is no required or minimum salary and there is no need to pay overtime. Indeed, if the outside sales exemption applies, those brokers paying loan officers a monthly commission can continue doing so. Furthermore, there are no significant tests to meet for the outside sales exemption to apply. In fact, the only real decisive factor is that the employee be employed in a job that requires him to be out of the office the majority of the time he is working. In its ideal application, the outside sales exemption is designed for door-to-door salesmen, although it need not be limited to that situation. Rather, the outside sales exemption can be used for any employee whose work requires him to be out of the office more than he is in the office.
In many respects, the outside sales exemption is easy to understand and apply. However, there are common mistakes that employers make. One of the most common mistakes is misunderstanding the scope of what is considered the "office." Under the exemption, any office--whether it is a home office, alternative work site or the employer's office--is an office at which a loan officer's time spent is considered inside as opposed to outside. For example, an employee who spends little or no time at his employer's office but whose working time is mostly spent working from home would not properly be classified under the outside sales exemption. Rather, for that exemption to apply, the employee would have to spend more time canvassing, visiting clients and meeting with referrals than he would spend collectively at either of the office sites. Hence, merely being in an office separate from the employer's location is not sufficient. For the outside sales exemption to apply, the employee must truly spend the majority of time working outside of any office. Depending on the state where the employee works, a greater percentage of out-of-office time may be necessary to meet the outside sales exemption.
Another common mistake by employers is applying the exemption in cases where the employee does not, in fact, spend the majority of his time out of the office. In other words, employers overestimate the amount of time worked outside the office. To protect themselves from this situation, employers are strongly advised to prepare employment agreements and job descriptions clearly disclosing and requiring the employee's acknowledgement of the emphasis on work outside the office. Moreover, supervisors should be instructed to discipline employees who are not performing their jobs consistent with the requirements of the classification. Supervisors must be expected to encourage employees classified as outside sales to be out of the office and discipline employees who actually remain inside the majority of their working time.
The biggest problem with the outside sales exemption is that it is difficult to prove the amount of hours worked outside the office as opposed to inside the office. Hence, the outside sales exemption should only be utilized where it is obvious that the employee spends the majority of his time out of an office. Otherwise, an incorrect classification can expose an employer to significant liability--especially for large producers. Indeed, employers can be forced to pay minimum wage, regardless of how much commission was earned, and can be forced to pay overtime based upon the amount of money the employee earned through commission. Accordingly, while the outside sales exemption has many advantages, employers should only rely upon the exemption when it truly applies.
Ari Karen is a partner with Krupin O'Brien LLC, a national law firm that represents employers in labor relations and employment law. Please feel free to contact Ari if you have questions regarding state-specific issues concerning employment law. He may be reached at [email protected].